UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
ྈQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20082009
 
ྑ
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

Commission file number: 000-09459

NEW CENTURY COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
061034587
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)

98359831 Romandel Ave.
Santa Fe Springs, CA 90670
 (Address of principal executive offices)

(562) 906-8455
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

As of August 12, 2008,July 28, 2009, the Company had 15,344,65615,344,654 shares of common stock, $0.10 par value, issued and outstanding.

 
Documents incorporated by reference: None

NEW CENTURY COMPANIES, INC.

INDEX

NEW CENTURY COMPANIES, INC.

INDEX

  
Page No.
PART I - FINANCIAL INFORMATION
  
   
Item 1. Financial Statements F-1
   
Condensed Consolidated Balance Sheets -
June 30, 20082009 (Unaudited) and December 31, 20072008 F-1
   
Condensed Consolidated Statements of Operations (Unaudited) -  
Three and Six Months Ended June 30, 20082009 and 20072008 F-2
   
Condensed Consolidated Statements of Cash Flows (Unaudited) -  
Six Months Ended June 30, 20082009 and 20072008 F-3
   
Notes to Condensed Consolidated Financial Statements F-4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 78
   
Item 4T. Controls and Procedures 
7
9
   
PART II - OTHER INFORMATION
  
   
Item 1. Legal Proceedings 11
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
11
   
Item 3. Defaults Upon Senior Securities 
11
   
Item 4. Submission of Matters to a Vote of Security Holders 
11
   
Item 5. Other Information 
11
   
Item 6. Exhibits 
11
   
SIGNATURES 
12

2

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. For example, statements regarding the Company’s financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. These statements are generally accompanied by words such as “intend,” anticipate,” “believe,” “estimate,” “potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,” “expect” or the negative of such terms or other comparable terminology. The Company believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to it on the date hereof, but the Company cannot provide assurances that these assumptions and expectations will prove to have been correct or that the Company will take any action that the Company may presently be planning. However, these forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, available cash, research results, competition from other similar businesses, and market and general economic factors. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

3
 


Part I - Financial Information

ITEM 1.  FINANCIAL STATEMENTS

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 20082009 and December 31, 20072008

ITEM 1. FINANCIAL STATEMENTS

  
June 30, 2008
 
December 31,
 
  
2008
 
2007
 
  
(unaudited)
   
ASSETS
     
Current Assets
     
Cash  -  281,729 
Contract receivables, net  390,900  438,876 
Inventories, net  653,730  886,107 
Costs and estimated earnings in excess of billings on uncompleted contracts  435,434  570,797 
Deferred financing costs, current portion  139,178  358,292 
Prepaid expenses and other current assets  278,599  14,183 
        
Total current assets  1,897,841  2,549,984 
        
Property and Equipment, net
  227,860  269,092 
Deferred financing costs, long-term portion
  206,331  59,715 
Total Assets $2,332,032 $2,878,791 
        
LIABILITIES AND STOCKHOLDERS' DEFICIT
       
        
Current Liabilities
       
Bank Overdraft $66,627 $18,962 
Accounts payable and accrued liabilities  1,055,107  2,074,666 
Dividends payable  418,000  376,725 
Billings in excess of costs and estimated earnings on uncompleted contracts  329,038  88,025 
Capital lease obligation, current portion  26,703  25,597 
Deferred Gain on forgiveness of debt  554,218  - 
Convertible (2007 only) notes payable, net of discount of $319,133       
at June 30, 2008 and $1,175,504 for December 31, 2007, current portion  149,324  1,391,163 
        
Total current liabilities  2,599,017  3,975,138 
        
Long Term Liabilities
       
Capital lease obligation, long-term portion  19,750  37,679 
Deferred Gain on forgiveness of debt  600,402  - 
Convertible (2007 only) notes payable, net of discount of $345,728       
for June 30, 2008 and $0 for December 31, 2007, long-term portion  2,135,815  - 
        
Total long term liabilities  2,755,967  37,679 
        
Commitments and Contingencies
       
        
Stockholders' Deficit
       
Cumulative, convertible, Series B preferred stock, $1 par value,       
15,000,000 shares authorized, no shares issued and outstanding       
(liquidation preference of $25 per share)  -  - 
Cumulative, convertible, Series C preferred stock, $1 par value,       
75,000 shares authorized, 26,880 shares issued and outstanding       
(liquidation preference of $910,000)  26,880  26,880 
Cumulative, convertible, Series D preferred stock, $25 par value,       
75,000 shares authorized, 11,640 shares issued and outstanding       
(liquidation preference of $416,000)  291,000  291,000 
Common stock, $0.10 par value, 50,000,000 shares authorized;       
15,344,656 and 13,744,654 shares issued and outstanding       
at March 31, 2008 and December 31, 2008, respectivelly  1,534,466  1,374,466 
Subscriptions receivable  (462,500) (462,500)
Notes receivable from stockholders  (545,165) (545,165)
Deferred consulting fees  (166,756) (334,921)
Additional paid-in capital  9,397,195  9,748,781 
Accumulated deficit  (13,098,072) (11,232,567)
        
Total stockholders' deficit  (3,022,952) (1,134,026)
        
Total liabilities and stockholders' deficit $2,332,032  2,878,791 
  (Unaudited)    
  June 30,  December 31, 
  2009  2008 
ASSETS      
       
Current Assets      
Cash $-  $31,889 
Contract receivables, net of allowance of $0 and $24,000 for June 30, 2009 and December 31, 2008, respectively  11,906   237,787 
Inventories  422,856   564,022 
Costs and estimated earnings in excess of billings on uncompleted contracts  60,790   416,664 
Deferred financing costs  283,433   252,305 
Prepaid expenses and other current assets  160,182   168,668 
         
Total current assets  939,167   1,671,335 
         
Property and Equipment, net  152,225   186,906 
Deferred Financing Costs, net  113,862   233,702 
         
Total Assets $1,205,254  $2,091,943 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current Liabilities        
Bank overdraft $44,553  $15,329 
Accounts payable and accrued liabilities  1,643,751   1,417,464 
Dividends payable  500,550   459,275 
Billings in excess of costs and estimated earnings on uncompleted contracts  84,402   1,388,348 
Capital lease obligation, current portion  24,044   27,874 
Derivative liability  4,080,953   1,975,298 
CAMOFI Convertible note payable, net of discount of $1,423,780 at June 30, 2009 and $2,089,443 at December 31, 2008, respectively  1,403,501   737,838 
CAMHZN Convertible note payable, net of discount of $239,535 at June 30, 2009 and $350,090 at December 31, 2008, respectively  510,465   399,910 
CAMOFI Convertible Note, net of discount of $96,039  605,161   - 
CAMHZN Convertible Note, net of discount of $23,896  149,904   - 
         
Total current liabilities  9,047,284   6,421,336 
         
Long Term Liabilities        
Capital lease obligation, long term portion  -   9,804 
         
Total liabilities  9,047,284   6,431,140 
         
Commitments and Contingencies        
         
Stockholders' Deficit        
Cumulative, convertible, Series B preferred stock, $1 par value, 15,000,000 shares authorized, no shares issued and outstanding (liquidation preference of $25 per share)  -   - 
Cumulative, convertible, Series C preferred stock, $1 par value, 75,000 shares authorized, 26,880 shares issued and outstanding (liquidation preference of $672,000)  26,880   26,880 
Cumulative, convertible, Series D preferred stock, $25 par value, 75,000 shares authorized, 11,640 shares issued and outstanding (liquidation preference of $291,000)  291,000   291,000 
Common stock, $0.10 par value, 50,000,000 shares authorized; 15,344,654 shares issued and outstanding at June 30, 2009 and December 31, 2008  1,534,466   1,534,466 
Notes receivable from stockholders  (564,928)  (564,928)
Deferred equity compensation  (64,167)  (101,667)
Additional paid-in capital  7,390,021   7,355,007 
Accumulated deficit  (16,455,302)  (12,879,955)
         
Total stockholders' deficit  (7,842,030)  (4,339,197)
         
Total Liabilities and Stockholders' deficit $1,205,254  $2,091,943 
See accompanying notes to the condensed consolidated financial statements.

F-1
 
 
NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 20082009 and 20072008
(Unaudited)

  
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
  
2008
 
2007
 
2008
 
2007
 
          
          
CONTRACT REVENUES
 $1,434,676 $2,600,147 $2,961,278 $5,785,616 
              
COST OF SALES
 $1,363,614  1,889,145  2,672,093  3,889,375 
              
GROSS PROFIT
  71,062  711,002  289,185  1,896,241 
              
OPERATING EXPENSES
             
Consulting and other compensation  73,998  212,955  345,382  642,318 
Salaries and related  74,123  110,336  127,619  226,970 
Selling, general and administrative  278,441  195,095  716,470  368,371 
TOTAL OPERATING EXPENSES
  426,562  518,386  1,189,471  1,237,659 
              
OPERATING INCOME (LOSS)
  (355,500) 192,616  (900,286) 658,582 
              
OTHER INCOME (EXPENSES)
             
Gain (loss) on writeoff of accounts payable  3,577  4,729  60,205  (6,959)
Interest expense  (497,382) (722,273) (984,151) (1,187,514)
              
TOTAL OTHER EXPENSES
  (493,805) (717,544) (923,946) (1,194,473)
              
LOSS BEFORE PROVISION FOR
             
INCOME TAXES
  (849,305) (524,928) (1,824,232) (535,891)
              
PROVISION FOR INCOME TAXES
  -  -  -  - 
              
NET LOSS
 $(849,305)$(524,928)$(1,824,232)$(535,891)
              
Preferred Stock Dividends $(41,275)$27,350 $(41,275)$27,350 
              
NET LOSS APPLICABLE
             
TO COMMON STOCKHOLDERS
 $(890,580) (497,578)$(1,865,507)$(508,541)
              
Basic and diluted net loss available to
             
common stockholders per common share
 $(0.06) (0.04)$(0.13)$(0.04)
              
Basic and diluted weighted average common
             
shares outstanding
  14,200,975  12,654,601  14,040,672  12,320,927 

  For the Three Months Ended June 30,  For the Six Months Ended June 30, 
     As Restated     As Restated 
  2009  2008  2009  2008 
             
CONTRACT REVENUES $1,359,630  $1,434,676  $2,414,332  $2,961,278 
                 
COST OF SALES  1,193,730   1,363,614   2,012,623   2,672,093 
                 
GROSS PROFIT  165,900   71,062   401,709   289,185 
                 
OPERATING EXPENSES                
Consulting and other compensation  77,158   73,998   139,773   345,382 
Salaries and related  83,409   74,123   236,496   127,619 
Selling, general and administrative  135,967   278,441   367,988   716,470 
TOTAL OPERATING EXPENSES  296,534   426,562   744,257   1,189,471 
                 
OPERATING LOSS  (130,634)  (355,500)  (342,548)  (900,286)
                 
OTHER INCOME (EXPENSES)                
Gain on writeoff of accounts payable  -   3,577   5,681   60,205 
(Loss) / gain on valuation of derivative liabilities  225,075   1,287,654   (1,575,903)  2,588,416 
Interest expense  (952,461)  (497,382)  (1,620,856)  (984,151)
                 
TOTAL OTHER INCOME (EXPENSES)  (727,386)  793,849   (3,191,078)  1,664,470 
                 
INCOME (LOSS) BEFORE PROVISION FOR  INCOME TAXES  (858,020)  438,349   (3,533,626)  764,184 
                 
PROVISION FOR INCOME TAXES  -   -   -   - 
                 
NET INCOME ( LOSS) $(858,020) $438,349  $(3,533,626) $764,184 
                 
Preferred Stock Dividends $(41,275) $(41,275) $(41,275) $(41,275)
                 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(899,295) $397,074  $(3,574,901) $722,909 
                 
Basic net income (loss) available to common stockholders per common share $(0.06) $0.03  $(0.23) $0.05 
                 
Diluted net income (loss) available to common stockholders per common share $(0.06)  0.01   (0.23) $0.02 
                 
Basic weighted average common shares outstanding  15,344,654   15,344,656   15,344,654   15,344,656 
                 
Diluted weighted average common shares outstanding  15,344,654   45,450,838   15,344,654   45,450,838 

See accompanying notes to the condensed consolidated financial statements.

F-2

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 20082009 and 20072008
(Unaudited)

  
2008
 
2007
 
      
      
Cash flows from operating activities:     
Net loss $(1,824,232)$(535,891)
Adjustments to reconcile net loss to net cash       
(used in) provided by operating activities:       
Depreciation and amortization of property and equipment   41,232  63,535 
Gain on write off of accounts payable   (60,205) - 
Amortization of deferred financing cost   180,960  179,148 
Amortization of debt discount   503,788  848,485 
Amortization of deferred consulting fees and deferred employees stock option   168,165  (126,683)
Estmated fair market value of common stock issued for consulting services         
and related change in fair value  83,000  610,000 
Conversion of interest to common stock   -  74,317 
Bad debt expense   27,259  - 
        
Changes in operating assets and liabilities:        
 Contracts receivable  20,717  (4,766)
 Inventories  232,377  (173,695)
 Costs and estimated earnings in excess of billings on uncompleted contracts  135,363  48,960 
 Prepaid expenses and other current assets  (264,416) 18,645 
 Notes receivable from stockholders  -  (17,500)
 Accounts payable and accrued liabilities  202,406  (77,846)
 Billings in excess of costs and estimated earnings on uncompleted contracts  241,013  (99,635)
        
Net cash (used in) provided by operating activities  (312,573) 807,074 
        
Cash flows from investing activities:       
Purchases of property and equipment  -  (30,000)
        
Net cash used in investing activities  -  (30,000)
        
Cash flows from financing activities:       
Restricted cash  -  123,898 
Bank overdraft  47,665  6,929 
Proceeds of issuance of convertible notes payable  -  - 
Principal payments on notes payable  (16,821) (620,523)
Deferred financing costs  -  - 
        
Net cash provided by (used in) financing activities  30,844  (489,696)
        
Net (decrease) increase in cash  (281,729) 287,378 
        
Cash at beginning of period  281,729  53,318 
        
Cash at end of period $- $340,696 
        
Supplemental disclosure of non-cash financing and investing activities:       
        
Accrued cumulative dividends on preferred stock $41,275 $42,400 
        
Reversal of accrued dividends older than four years on preferred stock $- $(69,750)
        
Conversion of notes payable and interest to common stock $- $424,317 
        
Common stock and warrants issued for deferred financing costs $102,500 $- 
     As Restated 
  2009  2008 
       
Cash flows from operating activities:      
Net (loss) income $(3,533,626) $764,184 
Adjustments to reconcile net (loss) income to net cash used in operating activities:        
Depreciation and amortization of property and equipment  34,681   41,232 
Bad debt expense  -   27,259 
Gain on write off of accounts payable  (5,681)  (60,205)
Amortization of deferred financing costs  233,712   180,960 
Estimated fair value of options issued to employees  35,014   - 
Amortization of stock-based consulting fees and employee compensation  37,500   251,165 
Amortization of BCF and debt discount  1,136,035   503,788 
(Gain) / loss on valuation of derivatives liabilities  1,575,903   (2,588,416)
         
Changes in operating assets and liabilities:        
Contracts receivable  225,881   20,717 
Inventories  141,166   232,377 
Costs and estimated earnings in excess of billings on uncompleted contracts  355,874   135,363 
Prepaid expenses and other current assets  8,486   (264,416)
Accounts payable and accrued liabilities  281,520   202,406 
Billings in excess of costs and estimated earnings on uncompleted contracts  (1,303,946)  241,013 
         
Net cash used in operating activities  (777,481)  (312,573)
         
Cash flows from financing activities:        
Bank overdraft  29,224   47,665 
Proceeds from issuance of convertible notes payable, net of financing costs  730,000   - 
Principal payments on notes payable and capital lease  (13,632)  - 
Deferred financing cost  -   (16,821)
         
Net cash provided by financing activities  745,592   30,844 
         
Net change  in cash  (31,889)  (281,729)
         
Cash at beginning of period  31,889   281,729 
         
Cash at end of period $-  $- 
         
Supplemental disclosure of non-cash financing and investing activities:        
         
Accrued cumulative dividends on preferred stock $41,275  $41,275 
         
Debt discount recorded on convertible notes payable $479,752  $2,755,107 
         
Stock and warrants Issued for Financing Costs $-  $102,500 

See accompanying notes to the condensed consolidated financial statements.

F-3

NEW CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 AND 2007(As Restated)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization And Nature Of Operations

New Century Companies, Inc. and its wholly owned subsidiary, New Century Remanufacturing, Inc., (collectively, the "Company"), a California corporation, was incorporated March 1996 and is located in Southern California. The Company provides after-market services, including rebuilding, retrofitting and remanufacturing of metal cutting machinery. Once completed, a remanufactured machine is "like new" with state-of-the-art computers and the cost to the Company's customers is substantially less than the price of a new machine.

The Company currently sells its services by direct sales and through a network of machinery dealers acrossprimarily in the United States. Its customers are generally medium to large sized manufacturing companies in various industries where metal cutting is an integral part of their businesses. The Company grants credit to its customers who are predominately located in the western United States.

The Company trades on the OTC Bulletin Board under the symbol "NCNC.OB"."NCNC."

Principles Of Consolidation

The condensed consolidated financial statements include the accounts of New Century Companies, Inc. and its wholly owned subsidiary, New Century Remanufacturing, Inc..Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis Of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements and the notes hereto should be read in conjunction with the consolidated financial statements, accounting policies and notes thereto included in the Company's Annual Report on Form 10-KSB10-K for the year ended December 31, 2007,2008, filed with the SEC. In the opinion of management, all adjustments necessary to present fairly, in accordance with GAAP, the Company's financial position as of June 30, 2008,2009, and the results of operations and cash flows for the interim periods presented, have been made.  Such adjustments consist only of normal recurring adjustments.  The results of operations for the three and six months ended June 30, 20082009 are not necessarily indicative of the results for the full year ending December 31, 2008.2009. Amounts related to disclosure of December 31, 20072008 balances within these interim condensed consolidated financial statements were derived from the audited 20072008 consolidated financial statements and notes thereto.

F-4

Reclassifications

The Company has reclassified the presentation of prior-year information to conform to the current presentation.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. TheAs of June 30, 2009, the Company has losses from operations year to date of approximately $849,000, an accumulated deficit of approximately $13,098,000 and$16,455,000, had recurring losses, a negative working capital balancedeficit of approximately $701,000.$8,108,000, and was also in default on its convertible notes. These factors among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing arrangements which management believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2008.2009. Therefore, the Company will be required to seek additional funds to finance its long-term operations.

In response to these problems, management has taken the following actions:
·The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.
·The Company has successfully restructured its debt, eliminating the penalties and interest for past default and extending the repayment term (See Note 3).

The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.
 
In response to these problems, management has taken the following actions:
·
The Company continues its aggressive program for selling machines.
·
The Company continues to implement plans to further reduce operating costs.
·
The Company is seeking investment capital through the public and private markets.
·
The Company is seeking strategic acquisition candidates.

The condensed consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Inventory

Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out method. Inventories represent cost of work in process on units not yet under contract. Cost includes all direct material and labor, machinery, subcontractors and allocations of indirect overheadoverhead.  At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. Among other factors, the Company considers historical demand and forecasted demand in relation to the inventory on hand and market conditions when determining obsolescence and net realizable value. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost offset by reserve for estimated markdowns on inventory costs.basis of the excess or obsolete inventories.

 
Inventory costs as of June 30, 2008 and December 31, 2007:Revenue Recognition

  June 30, 2008 December 31, 2007 
      
Cost of labor $67,000 $86,000 
Cost of materials  451,000  615,000 
Cost of subcontracted services  42,000  61,000 
Allocation of indirect overhead cost  
380,000
  
410,000
 
        
Gross inventory $
940,000
 $1,172,000 
        
Reserve for estimated markdowns on inventory costs  
(286,000
)
 (286,000)
        
Net inventory $
654,000
 $886,000 
F-5
Revenue Recognition
The Company's revenues consist primarily of contracts with customers. The Company uses the percentage-of-completion method of accounting to account for long-term contracts pursuant to Statements of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, and, therefore, takes into account the cost, estimated earnings and revenue to date on fixed-fee contracts not yet completed. The percentage-of-completion method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The Company recognizes revenue on contracts pursuant to Statements of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”


For revenues from stock inventory the Company follows Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue other than revenue on contacts, and provides guidance for presentation of this revenue and for disclosure related to these revenue recognition policies in financial statements filed with the SEC.
 
F-5

For contracts, the amount of revenue recognized at the financial statement date is the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates of cost to complete. It is not related to the progress billings to customers. Contract costs include all materials, direct labor, machinery, subcontract costs and allocations of indirect overhead.

Because contracts may extend over a period of time, changes in job performance, changes in job conditions and revisions of estimates of cost and earnings during the course of the work are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements.

Contracts that are substantially complete are considered closed for financial statement purposes. Costs incurred and revenue earned on contracts in progress in excess of billings (under billings) are classified as a current asset. Amounts billed in excess of costs and revenue earned (over billings) are classified as a current liability.

For revenues from stock inventory the Company follows Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue other than revenue on contacts, and provides guidance for presentation of this revenue and for disclosure related to these revenue recognition policies in financial statements filed with the SEC.

The Company accounts for shipping and handling fees and costs in accordance with Emerging Issues Task Force ("EITF")EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Shipping and handling fees and costs incurred by the Company are immaterial to the operations of the Company and are included in cost of sales.

In accordance with Statements of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate for markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience, current industry trends and estimated costs. As of June 30, 2008,2009, the Company estimated the markdowns, price concessions and warranty costs and concluded amounts are immaterial and did not record any adjustment to revenues.

F-6
Basic And Diluted Loss Per Common Share

Basic net incomeearnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss)loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for each respective period.

Common stock equivalents, representing convertible preferred stock,Preferred Stock, convertible debt, options and warrants totaling approximately 1,352,00074,320,847 shares at June 30, 2008 and 6,192,972 at December 31, 20072009 are not included in the diluted loss per share as they would be anti-dilutive. Accordingly,Common stock equivalents, representing convertible Preferred Stock, convertible debt, options and warrants totaling approximately 30,106,000 are included in the diluted and basic lossincome per common share are the same at June 30, 2008 and December 31, 2007.2008.

Stock Based Compensation

Effective January 1, 2006, we adopted the fair value method of accounting for employee stock compensation cost pursuant to SFAS No. 123-R, “Share-Based Payments”. Prior to that date, the Company used the intrinsic value method under Accounting Policy Board Opinion No. 25 to recognize compensation cost.
123(R), “Share-Based Payments.” Under the modified prospective methodfair value recognition provisions of adoption for SFAS No. 123-R, the123(R), share-based compensation cost recognized byis measured at the Company beginning January 1, 2006 includes compensation cost for all equity incentive awards granted subsequent to January 1, 2006,grant date based on the grant-date fair value estimated in accordance withof the provisions of SFAS No. 123-R. The Company had no equity incentive awards granted prior to January 1, 2006 that were not yet vested. Accordingly,award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.  For the three and six months ended June 30, 2009 and 2008, $35,014 and $0, and $86,400respectively, of share-based compensation expense was recognized in the accompanying condensed consolidated financial statements for the three month periods ended June 30, 2008 and 2007, respectively. $0 and $216,000 of share-based compensation expense was recognized in the accompanying condensed consolidated financial statements for the six month periods ended June 30, 2008 and 2007, respectively.operations.

F-6

From time to time, the Company's Board of Directors grants common share purchase options or warrants to selected directors, officers, employees, consultants and advisors in payment of goods or services provided by such persons on a stand-alone basis outside of any of the Company's formal stock plans. The terms of these grants are individually negotiated and generally expire within five years from the grant date.

Under the terms of the Company's 2000 Stock Option Plan, options to purchase an aggregate of 5,000,000 shares of common stock may be issued to officers, key employees and consultants of the Company. The exercise price of any option generally may not be less than the fair market value of the shares on the date of grant. The term of each option generally may not be more than five years.

On November 13, 2006, the Company granted 2,000,000 options to key employees. At June 30, 2008, the Company had 1,050,000 options available for future issuance under their equity compensation plans.

There is no share-based compensation resulting from the application of SFAS No. 123-R123R to options granted outside of the Company's Stock Option Plan for the three orand six months ended June 30, 20082009 and 2007.2008. Share-based compensation recognized as a result of the adoption of SFAS No. 123-R123R use the Black-ScholesBlack Scholes option pricing model for estimating fair value of options granted.

F-7
In accordance with SFAS No. 123-R,123R, the Company’s policy is to adjust share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience.
The effectfair value of adjustingstock-based awards to employees and directors is calculated using the forfeitureBlack-Scholes option pricing model, even though the model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restriction, which differ significantly from the Company's stock options. The Black-Scholes model also requires subjective assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate for all expense amortization after December 31, 2007selected to value any particular grant is recognizedbased on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of our common stock. These factors could change in the periodfuture, affecting the forfeiture estimate is changed,determination of stock-based compensation expense in future periods.
There were no changes occurred inoptions granted, exercised or cancelled during the periodsix months ended June 30, 2007.2009.  There are 900,000 shares available for grant at June 30, 2009.
 
OptionsAll options outstanding that have vested and are expected to vest as of June 30, 20082009 and are as follows:

      Weighted   
    Weighted Average   
    Average Remaining Aggregate 
  Number of Exercise Contractual Intrinsic 
  Shares Price Term in Years Value (1) 
Vested (2)  3,950,000 $0.20  0.97 $
—
 
Expected to vest  —              $
—
 
Total  3,950,000              $
—
 
         Weighted    
      Weighted  Average    
      Average  Remaining  Aggregate 
   Number of  Exercise  Contractual  Intrinsic 
   Shares  Price  Term in Years  Value (1) 
             
Vested  4,100,000  $0.15   1.49  $— 
 
(1)These values are calculated as the difference between the exercise price and $0.13, the closing market price of the Company's common stock on June 30, 2008 as quoted on the Over-the-Counter Bulletin Board under the symbol "NCNC.OB" for all in-the-money options outstanding.
(2)Includes 800,000 options that became fully vested on March 14, 2008 and are valued at $120,000 based on the stock market price of the shares at the contract date.
F-8
Options outstanding that are expected to vest are net of estimated future forfeitures which are estimated when compensation costs are recognized in accordance with the provisions of SFAS No. 123-R, Additional information with respect to stock option activity is as follows:

    Outstanding Options 
  Shares   Weighted Aggregate 
  Available Number of Average Intrinsic 
  for Grant Shares Exercise Price Value (1) 
          
December 31, 2007  1,050,000  3,950,000 $0.20 $79,000 
              
Grants  
—
  
—
  
—
    
Exercises  
—
  
—
  
—
    
Cancellations  
—
  
—
  
—
    
June 30, 2008  1,050,000  3,950,000 $0.20 $
—
 
              
Options exercisable at:             
June 30, 2008     3,950,000 $0.20    
December 31, 2007     3,150,000 $0.20    
(1)
Represents the added value as difference between the exercise price and the closing market price of the Company's common stock at the end of the reporting period (as of June 30, 20082009 and December 31, 2007,2008, the market price of the Company's common stock was $0.13$0.07 and $0.22,$0.05, respectively) for all in-the-money options outstanding..
.

 
F-7

The Company follows SFAS No. 123-R123(R) (as interpreted by EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services") to account for transactions involving services provided by third parties where the Company issues equity instruments as part of the total consideration. Pursuant to paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions using the fair value of the consideration received (i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company applies EITF Issue No. 96-18 in transactions when the value of the goods and/or services are not readily determinable the fair value of the equity instruments is more reliably measurable and the counterparty receives equity instruments in full or partial settlement of the transactions, using the following methodology:

a) For transactions where goods have already been delivered or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date of issuance).

b) For transactions where the instruments are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.

c) For any transactions not meeting the criteria in (a) or (b) above, the Company re-measures the consideration at each reporting date based on its then current stock value.

The following table summarizes information related to stock options outstanding and exercisable at June 30, 2009:

Exercise Price 
Number of
Options
outstanding
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
 
$ 0.075-0.083  1,300,000   0.24  $0.08 
             
$ 0.15-0.20  2,800,000   1.25  $0.19 
             
   4,100,000      $0.15 
 From time to time, the Company issues warrants to employees and to third parties pursuant to various agreements, which are not approved by the shareholders.

The following is a status of the contract.warrants outstanding at June 30, 2009 and December 31, 2008:
c) For any transactions not meeting the criteria in (a) or (b) above, the Company re-measures the consideration at each reporting date based on its then current stock value.
    Outstanding Warrants 
      Weighted  Aggregate 
   Number of  Average  Intrinsic 
   Shares  Exercise Price  Value (1) 
          
December 31, 2008  5,586,824  $0.21  $— 
             
Grants  —   —     
   —   —     
Exercises  —   —     
Cancellations/ Terminated  —   —     
             
Outstanding and Exercisable at            
June 30, 2009  5,586,824  $0.21   — 
 (1) Represents the added value as difference between the exercise price and the closing market price of the Company's common stock at the end of the reporting period (as of June 30, 2009 and December 31, 2008, the market price of the Company's common stock was $0.07 and $0.05, respectively).

F-9
F-8

The following table summarizes information related to warrants outstanding and exercisable at December 31, 2009:

Exercise Price 
Number of
Warrants
outstanding
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
 
$ 0.60-0.70  1,372,538   0.72  $0.64 
             
$ 0.07  4,214,286   3.39  $0.07 
             
   5,586,824      $0.21 

Deferred Financing Costs

Note Payable

Direct costs of securing debt financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

In June 2008, in connection with the CAMOFI debt reduction as discussed in Note 3, the Company entered into a contract with a third party for financial services. The Company issued 300,000 shares of common stock valued at $36,000, based on the market price of the shares on the date of the agreement. The fee is capitalized and amortized over the term of the related debt.

interest expense. During the three months ended June 30, 20082009 and 2007,2008, the Company amortized approximately $117,000 and $90,000, respectively, to interest expense. During the six months ended June 30, 20082009 and 2007, the Company amortized approximately $181,000 to interest expense. At June 30, 2008, the unamortized portion of deferred financing costs for the CAMOFI note payable is approximately $275,000.

Real Estate Lease

On April 1st, 2008, the company entered into a commercial lease agreement to lease its premises for ten years. Per the lease, the Company incurred a brokerage fee of approximately $72,500. This cost is capitalized and amortized over the term of the lease.

During the three months ended June 30, 2008, the Company amortized approximately $1,800$234,000 and $181,000, respectively, to rentinterest expense. At June 30, 2008, the unamortized portion of deferred brokerage fees for the lease payable is approximately $70,000.
Income Taxes

WeFair Value Measurements

The Company adopted  SFAS No. 157, “Fair Value Measurements”, in the provisionsfirst quarter of fiscal 2008.  SFAS 157 was amended in February 2008 by the Financial Accounting Standards Accounting Board Interpretation(“FASB”) Staff Position (“FSP”) FAS No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation157-1, “Application of FASB Statement No. 109 ("157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions”, and by FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, which delayed the Company’s application of SFAS 109") on157 for nonrecurring nonfinancial assets and liabilities until January 1, 2007. The implementation2009. FAS 157 was further amended in October 2008 by FSP FAS 157-3, “Determining the Fair Value of FIN 48a Financial Asset When the Market for That Asset Is Not Active”, which clarifies the application of SFAS 157 to assets participating in inactive markets.

Implementation of SFAS 157 did not resulthave a material effect on the Company’s results of operations or financial position and had no effect on the Company’s existing fair-value measurement practices. However, SFAS 157 requires disclosure of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. The three levels of the fair-value hierarchy are described as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, Level 1 inputs include quoted prices on the Company’s securities that are actively traded.

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly. For the Company, Level 2 inputs include assumptions such as estimated life, risk free rate and volatility estimates used in determining the fair values of the Company’s option and warrant securities issued.

Level 3: Unobservable inputs for the asset or liability. Beginning January 1, 2009, Level 3 inputs may be required for the determination of fair value associated with certain nonrecurring measurements of nonfinancial assets and liabilities. The Company does not currently present any adjustment tononfinancial assets or liabilities at fair value.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows (unaudited):

F-9

              June 30, 
  Level 1  Level 2  Level 3  2009 
                 
Fair value of derivative liability  —  $—   $4,080,953   $4,080,953 
             
Total $—  $—  $4,080,953  $4,080,953 
The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2009.

Accounting for Derivative Instruments
In connection with the issuance of certain convertible notes payable (see Note 3), the notes provided for a conversion into shares of the Company's beginning tax positions.common stock at a rate which was determined to be variable. The Company continues to fully recognize its tax benefits which are offset by a valuation allowance to the extent that it is more likely than notdetermined that the deferred tax assets will not be realized. Asvariable conversion feature was an embedded derivative instrument pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the note agreements and at fair value as of each subsequent balance sheet date. In addition, under the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the debenture agreements, the Company was required to classify all other non-employee options and warrants as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.
During the six months ended June 30, 2009 and 2008, the Company did not have any unrecognized tax benefits. The Company files a Consolidated Federalrecognized other expense of $1,575,903 and other income tax return inof $2,588,416, respectively, related to recording the U.S. The Company files a separate income tax return inderivative liability at fair value. At June 30, 2009 and December 31, 2008, the Statederivative liability balance was $4,080,953 and $1,975,298, respectively.
Warrant-related and conversion-related derivatives were valued using the Black-Scholes Option Pricing Model with the following assumptions during the six months ended June 30, 2009 and 2008: dividend yield of California. The Company is no longer subject0%; volatility ranging from 178% to U.S. Federal tax examinations for the years before 2004,670%(2009) and 160% to the State of California for the years before 2003.187% (2008), respectively; and risk free interest rates ranging from 0.19% to 2.54% (2009) and 0.10% to 2.21% (2008).

F-10

The following table summarizes the activity related to the derivative liability during the six months ended June 30, 2009:
 
Derivative liability - December 31, 2008 $2,025,298 
     
Derivative liability added during the year  479,752 
     
Change in fair value of derivative liability  1,575,903 
     
Total derivative liability - June 30, 2009 $4,080,953 

Significant Recent Accounting Pronouncements

In December 2007,June 2009, the FASB issued SFAS No. 141(R),168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a Replacement of FASB Statement No. 162 Business Combinations. ("SFAS No. 141(R) retains168").  The Codification will become the fundamental requirements in SFAS No. 141, Business Combinations, that the acquisition methodsource of accounting be usedauthoritative U.S. GAAP.  The statement is effective for all business combinationsfinancial statements issued for interim and for an acquirer to be identified for each business combination. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS No. 141(R). In addition, SFAS No. 141(R) requires acquisition costs and restructuring costs that the acquirer expected but was not obligated to incur to be recognized separately from the business combination, therefore, expensed instead of part of the purchase price allocation. SFAS No. 141(R) will be applied prospectively to business combinations for which the acquisition date is on orannual periods ending after the beginning of the first annual reporting period beginning on or after DecemberSeptember 15, 2008. Early adoption is prohibited.2009.  The Company expects to adopt SFAS No. 141(R)this standard with the filing of its Quarterly Report on Form 10-Q for the period ended September 30, 2009 and does not expect the standard to any business combinations with an acquisition datehave a material impact on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51. SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact SFAS No. 160 may have on itsCompany’s  consolidated financial statements.

In September 2006,April 2009, the FASB issued SFAS No. 157, “FairFSP FAS 157-4, Determining Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a frameworkWhen the Volume and Level of Activity for measuringthe Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which provides additional guidance for estimating fair value in generally accepted accounting principlesaccordance with Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS 157”).  FSP FAS 157-4 states that a significant decrease in the volume and expands disclosures aboutlevel of activity for the asset or liability when compared with normal market activity is an indication that transactions or quoted prices may not be determinative of fair value measurements. SFAS No. 157 applies under other accounting pronouncementsbecause there may be increased instances of transactions that require or permit fair value measurements, the FASB having previously concludedare not orderly in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007.such market conditions.  The adoption of SFAS No. 157FSP FAS 157-4 did not have a significantmaterial impact on the Company’s consolidated financial statements.position, results of operations or liquidity.

In February 2007,April 2009, the FASB issued SFAS No. 159, “TheFSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value Option forof Financial AssetsInstruments (“FSP FAS 107-1 and Financial Liabilities.” SFAS No. 159 expandsAPB 28-1”), which requires disclosures about the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of the Company’s financial position,instruments for which it is practicable to estimate that value, whether recognized or not recognized in the balance sheets, in the interim reporting periods as well as in the annual reporting periods. In addition, FSP FAS 107-1 and offers an irrevocable optionAPB 28-1 requires disclosures of the methods and significant assumptions used to recordestimate the vast majority of financial assets and liabilities at fair value with changes in fair value recorded in earnings. SFAS No. 159 isof those financial instruments.  FSP FAS 107-1 and APB 28-1 became effective for the Company in its second quarter of fiscal years beginning after November 15, 2007.2009.  The adoption of SFAS No. 159FSP FAS 107-1 and APB 28-1 did not have a significantmaterial impact on the Company’s consolidated financial statements.position, results of operations or liquidity.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), which establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities and requires additional disclosures related to debt and equity securities.  FSP FAS 115-2 and FAS 124-2 does not change existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 became effective for the Company in its second quarter of fiscal 2009.  The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial position, results of operations or liquidity.

F-11

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force, or “EITF”), the AICPA,EITF) and the SECAmerican Institute of Certified Public Accountants did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

F-11
2. CONTRACTS IN PROGRESS

Contracts in progress which include completed contracts not completely billed approximate:approximate the following as of June 30, 2009 and December 31, 2008:

  June 30, 2008 December 31, 2007 
      
Cumulative costs to date $ 5,017,000 $7,007,000 
Cumulative gross profit to date  4,007,000  7,893,000 
        
Cumulative revenue earned  
9,024,000
  
14,900,000
 
Less progress billings to date  
(8,918,000
)
 
(14,350,000
)
        
Net under billings $106,000 
$
550,000
 
   June 30, 2009  December 31, 2008 
       
Cumulative costs to date $2,578,000  $6,756,000 
Cumulative gross profit to date  2,050,000   5,768,000 
         
Cumulative revenue earned  4,628,000   12,524,000 
Less progress billings to date  (4,651,000)  (13,495,000)
         
Net over billings $(23,000) $(971,000)

The following approximate amounts are included in the accompanying condensed consolidated balance sheets under these captions:

  June 30, 2008 December 31, 2007 
      
Costs and estimated earnings in excess of billings on uncompleted contracts $
435,000
 $571,000 
Billings in excess of costs and estimated earnings on uncompleted contracts  
(329,000
)
 
(88,000
)
        
Net under billings $
106,000
 $
483,000
 
   June 30, 2009  December 31, 2008 
       
Costs and estimated earnings in excess of billings on uncompleted contracts $61,000  $417,000 
         
Billings in excess of costs and estimated earnings on uncompleted contracts  (84,000)  (1,388,000)
         
Net over billings $(23,000) $(971,000)

F-12

3. CONVERTIBLE DEBT
3. CAMOFI Master LDC (“CAMOFI”) DEBT
CAMOFI AND CAMHZN 12% AND 15% Senior Secured Convertible Debt
On February 28, 2006,
The Company’s convertible debt financing, Amended 12% CAMOFI Convertible Note (“Amended 12% CAMOFI Note”) and 15% CAMHZN Convertible Note (“15% CAMHZN Note”), are in default.  The last monthly contractual payment on the Company secured a 12% senior convertible promissoryCAMOFI note with CAMOFI Master LDC.was made in October 2008 and no payments have made on the CAMHZN Note which were scheduled to begin on September 1, 2008.  The Convertible Notes aggregate to $3,897,213 principal and interest.  As of June 26,30, 2009 and December 31, 2008, an aggregate of $3,800,890the principal balances, accrued interest and penalties were due under the note.debt discounts are presented in the table below.
   June 30, 2009  December 31, 2008 
CONV NOTES CAMOFI  CAMHZN  CAMOFI  CAMHZN 
Principal $2,827,281  $750,000  $2,827,281  $750,000 
Discount related to warrants liability  (81,340)  (33,541)  (119,369)  (48,890)
Discount related to convertible option liability  (1,301,502)  (205,994)   (1,909,996)  (301,200)
Discount related to stock issued with notes  (40,938)      (60,078)    
Notes presented net of debt discounts $1,403,501  $510,465  $737,838  $399,910 
                 
Accrued Interest $226,182  $93,750  $56,546  $37,500 

PursuantDuring the three months ended June 30, 2009 and 2008, the Company amortized debt discounts of approximately $751,000 and $252,000, respectively, to interest expense related to the 12% and 15% Convertible Notes. During the six months ended June 30, 2009 and 2008, the Company amortized debt discounts of approximately $776,000 and $178,000, respectively, to interest expense related to the 12% and 15% Convertible Notes.

The Convertible Debt and Warrant Agreements include an anti-dilution feature and a letter agreement dated June 26, 2008 (the “Letter Agreement”) between New Century Companies, Inc. (the “Company”)buy-in clause which cause the embedded conversion option and CAMOFI Master LDC (“CAMOFI”), CAMOFI agreedthe warrants to waive certain penaltiesbe treated as derivative liabilities which are valued on a quarterly basis and default interest which have been accrued under the transaction documents previously entered into with CAMOFI, includingresulting change in fair value of the derivative liabilities are recorded as a 12% Senior Secured Convertible Promissory Note due February 20, 2009gain or loss upon valuation in the original principal amountstatement of $3,500,000, Security Agreement, an Amended and Restated Registration Rights Agreement, and a Subsidiary Guaranty. The waiver is subject to the Company’s performance of its obligations under the Letter Agreement and the execution of further documentation to be prepared inoperations.

In connection with the Letter Agreement. Pursuant to the Letter Agreement, the Company issued an amended and restatedAmended 12% CAMOFI Note, (the “Amended Note”) in the principal amount of $2,950,000 with a new maturity date of August 1, 2010.

Additionally, under the Letter Agreement, the Company issued 725,000 sharesfive year warrants with an exercise price of common stock$0.10 per share and 725,000 five year warrants with an exercise price of $0.10$0.20 per share.  Due to the anti-dilution feature in the warrant agreements, the warrants have a reduced exercise price of $0.07 and 725,000 fiveadjusted total warrants of 3,214,286 at June 30, 2009 and December 31, 2008.  As of June 30, 2009 and December 31, 2008, the fair value of the warrant derivative liability was determined to be $208,873 and $151,400 respectively.   Upon valuation, a gain of $1,305 was recorded for the three months ended June 30, 2009. For the six months ended June 30, 2009, a total loss of $57,473 was recorded.

In connection with the 15% CAMHZN Note, the Company issued 1,000,000 seven year warrants with an exercise price of $0.20. Commencing on August 1,$0.07 per share.  As of June 30, 2009 and December 31, 2008, and continuing thereafter on the first business day of every month for the next twenty-four months, the Company has the obligation to pay to CAMOFI the amount of $70,000, allocated first to the payment of interest and second to the payment of principal on the Amended and Restated Note. On or before August 1, 2010, the Company shall pay to CAMOFI all amounts still outstanding under the Amended and Restated Note, whether of principal, interest or otherwise.

The transaction qualified as Troubled Debt Restructuring under SFAS No. 15 due to the company’s current financial difficulties and the concessions granted by CAMOFI.  In accordance with SFAS No. 15, no gain on the forgiveness of interest and penalties  was recognized  as the carrying value of the note did not exceed the future cash payment at the time of transaction.  The fair value of the warrantswarrant derivative liability was determined to be $68,474 and $50,000 respectively. Upon valuation, a loss of $97 was recorded for the three months ended June 30, 2009. For the six months ended June 30, 2009, a total loss of $18,474 was recorded.

The Amended 12% CAMOFI and 15% CAMHZN Notes are both convertible into shares of common stock givenat a conversion price of $0.07 per share (subject to CAMOFI was approximately $233,000adjustment based on the Black Scholes pricing modelanti-dilution feature). At June 30, 2009 and December 31, 2008, the aggregate fair value CAMOFI conversion option derivative liabilities was $2,466,896 and $1,515,634, respectively. Upon valuation, a gain of $55,924 was recorded asfor the three months ended June 30, 2009. For the six months ended June 30, 2009, a reduction tototal loss of $951,262 was recorded. At June 30, 2009 and December 31, 2008, the note  The remaining forgiveness of the interest and penalties of $624,000 were recorded as a deferred gain.

The assumptions used in the Black-Scholes pricing model for this transaction were as following, risk free rate of 3.44%, expected life of 5 years and an implied volatility of 187%.  

CAMOFI also cancelled 3,476,190 warrants with a term of five years, which were issued on February 28, 2006 with an exercise price of $0.63 and 1,500,000 warrants dated December 19, 2006 with an exercise price of $0.35. Theaggregate fair value of such warrants onthe CAMHZN conversion option derivative liabilities was $654,400 and $308,264, respectively. Upon valuation, a gain of $14,835 was recorded for the three months ended June 26, 200830, 2009. For the six months ended June 30, 2009, a loss of $346,136 was approximately $530,000, based on the Black-Scholes pricing model and recorded as a deferred gain to be amortized to interest expense over the life of the debt.recorded.

F-13

CAMOFI AND CAMHZN Senior Secured Convertible Debt
Stock Purchase Warrants Issued and Cancelled in connection
On February 18, 2009, the Company entered into an agreement with CAMOFI note
In 2006, the Company granted warrants in connection withMaster LDC for the issuance of 12%a Senior Secured Convertible PromissoryNote for $701,200, maturing on August 18, 2009. The Note can be converted at $0.07 per share at any time during the term of the convertible note, subject to certain anti-dilution adjustments. The note is secured by all of the assets of the Company.

On February 18, 2009, the Company entered into an agreement with CAMHZN Master LDC for the issuance of a Senior Secured Convertible Note for $173,800 maturing on August 18, 2009. The Note can be converted at $0.07 per share at any time during the term of the convertible note, subject to certain anti-dilution adjustments.

The Notes are convertible into shares of common stock with a conversion price of $0.07. Per FAS 133 “Accounting for Derivative Instruments and Hedging Activities”, the conversion option is a derivative liability. The Company recorded at issuance a $384,460 derivative liability for the CAMOFI Note, and a $95,292 derivative liability for the CAMHZN Note. Under Accounting Principles Board Opinion No. 14, "Accounting for Convertible Debt and Debt Issued With Stock Purchase Warrants,"The conversion option liability is revalued each quarter. At June 30, 2009 the relative estimated fair value was $546,784 for the CAMOFI Note, and $135,526 for CAMHZN Note.  Upon valuation, a gain of such warrants represents$122,696 and $30,412, respectively, was recorded for the CAMOFI and CAMHZN notes for the three months ended June 30, 2009.  For the six months ended June 30, 2009, a discount fromloss of $162,324 and $40,234, respectively, was recorded for the CAMOFI and CAMZHN notes.

The Company recorded deferred financing costs at issuance of $116,200 on the CAMOFI Note and $28,800 on the CAMHZN Note for the difference between the face amount of the notes payable. Suchand the net proceeds received. In addition, the discounts resulting from the conversion options of $384,460 on the CAMOFI Note and $95,292 on the CAMHZN Note are amortized tointo interest expense ratably over the termlife of the notes. DuringNotes. For the three months ended June 30, 2008 and 2007,2009, the Company amortized approximately $175,000recorded amortization expense on the conversion option and $348,000,issuance costs of $215,476 and $74,985, respectively, to interest expense. Duringon the CAMOFI Note and $53,649 and 18,585, respectively, on the CAMHZN Note. For the six months ended June 30, 2008 and 2007,2009, the Company amortized approximately $333,000recorded amortization expense on the conversion option and $531,000,issuance costs of $288,421 and $108,750, respectively, to interest expense.
Beneficial Conversion Feature Of CAMOFI Convertible Notes Payable discontinued on June 26, 2008 for restructured debt
The convertible feature of certain notes payable provide for a rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible Instruments," the estimated fair value of the BCF is recorded in the condensed consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes. During the three months ended June 30, 2008 and 2007, the Company amortized approximately $84,000 and $208,000, respectively, to interest expense. During the six months ended June 30, 2008 and 2007, the Company amortized approximately $178,000 and $318,000, respectively, to interest expense. As part of the restructuring of the CAMOFI debt as discussed in Note 3, the CAMOFI debt no longer has a conversion feature.
For the three and six months ended June 30, 2008, no principal payments were made on the CAMOFI note. As of June 30, 2008Note and December 31, 2007,$71,396 and $57,844, respectively, on the principal balance is approximately $2,950,000 and $2,567,000, respectively, which is presented net of debt discounts totaling approximately $664,000 and $1,176,000, respectively.CAMHZN Note.

F-14
4. EQUITY TRANSACTIONS

Equity Compensation

In JuneFebruary 2008, the Company entered into a 19 dayyear contract with a third party for public relations services valued at $18,000.$30,000. The fee was paid in the form of 200,000150,000 shares of the Company’s common stock based on the stock market price of the shares at the contract date. The value of the common stock on the date of the transaction was recorded as a deferred charge and is amortized to operating expense over the life of the agreement.  At June 30, 2008, the remaining deferred consultingConsulting fees under this contract totaled $15,000.

In February 2008, the Company entered into a one-year contract with a third party for public relations services valued at $30,000. The fee was paid in the form of 150,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The fee was recorded as a deferred charge and is$2,500 were amortized to operating expense overduring the life of the agreement. Atthree months ended June 30, 2008, the remaining deferred consulting2008. Consulting fees under this contract totaled $17,500.of $2,500 and $5,000 were amortized to expense during the six months ended June 30, 2009 and June 30, 2008, respectively. As of June 30, 2009 the balance of deferred consulting fees was fully amortized.

In February 2008, the Company entered into a three month contract with a third party for public relations services valued at $20,000. The fee was paid in the form of 100,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The feevalue of the common stock on the date of the transaction was recorded as a deferred charge and wasis amortized to operating expense over the life of the agreement. AtConsulting fees under this contract of $20,000 were amortized to expense during the six months ended June 30, 2008 and at June 30, 2008 the feebalance of deferred consulting fees was amortized entirely.fully amortized.

F-14

In March 2008, the Company entered into a one month contract with a third party for public and financial communication services valued at $25,000. The fee was paid in the form of 125,000 shares of the Company’s common stock and the value was based on the stock market price of the shares at the contract date. The fee was recorded as a deferred charge and was amortized to operating expense over the life of the agreement. At June 30, 2008, the fee was amortized entirely.

In May 2007, the Company issued 100,000 shares of common stock valued at $70,000 (based on the market price of the shares) to a third party for public investor relations services under a one year contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction was recorded as a deferred charge and wasis amortized to operating expense over the life of the agreementagreement. Consulting fees under this contract of $25,000  were amortized to expense during the three and recorded assix months ended June 30, 2008 and at June 30, 2008 the balance of deferred compensation expense.consulting fees was fully amortized.

In June 2007, the Company issued 300,000 shares of common stock valued at $210,000 (based on the market price of the shares) toentered into a three year contract with a third party for internet public investor relations services under a three year contract.valued at $210,000. The fee was paid in the form of 300,000 shares of the Company’s common stock was recordedand valued based on the stock market price of the shares at the estimated faircontract date. The value of the common stock on the date of the transaction was recorded as a deferred charge.  $18,000 was amortized to operating expense during the three months ended June 30, 2009 and is2008.  $35,000 was amortized overto operating expense during the life of the agreement.six months ended June 30, 2009 and 2008. At June 30, 2009 and December 31, 2008, the remaining deferred consulting fees under this contract totaled $134,167.

In June 2007, the Company issued 15,000 shares of common stock valued at $10,500 (based on the market price of the shares) to a third party for public investor relations services under a 90 day contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction$64,167 and was amortized over the life of the agreement.

F-15

In June 2007, the Company issued 75,000 shares of common stock valued at $52,500 (based on the market price of the shares) to a third party for corporate consulting and market services under a 6 month contract. The common stock was recorded at the estimated fair value of the common stock on the date of the transaction and was amortized over the life of the agreement.

In February 2007, the Company issued 150,000 shares of common stock valued at $60,000, based on the market price of the shares on the date the services were completed, to a third party for investor marketing services under a one month contract. The fee was recorded as public company expense in the first quarter of 2007.

In February 2007, the Company issued 100,000 shares of common stock valued at $36,000, based on the market price of the shares on the date the services were completed, to a third party for financial consulting services under a 13 day contract. The fee was recorded as public company expense in the first quarter of 2007.

In February 2007, the Company issued 300,000 shares of common stock valued at $126,000, based on the market price of the shares on the date the services were completed, to a third party for investor relation services under a one month contract. The fee was recorded as public company expense in the first quarter of 2007.

In accordance with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” since the value of the services were not readily determinable on transactions that occurred in 2007 and the fair value of the equity instruments was more reliably measurable, the value of the services were based on the market price of the shares. Further, under these arrangements, the performance criteria required for a measurement date was not reached until the service period was completed. As a result, the Company was required to re-measure the consideration at each reporting date based on its then current stock value. During the three and six months ended June 30, 2008, the Company recorded a decrease of approximately $10,000 on such services.

During the three months ended June 30, 2008 and 2007, the Company amortized approximately $90,000 of consulting expense related to deferred consulting fees on such equity based compensation arrangements. During the six months ended June 30, 2008 and 2007, the Company amortized approximately $179,000 of consulting expense related to deferred consulting fees on such equity based compensation arrangements.

As of June 30, 2008 and December 31, 2007, the unamortized portion of consulting fees on such equity based compensation arrangements approximate $167,000 and $234,000,$101,667, respectively.

Dividends on preferred stock

The preferred shares Series C shares and preferred shares Series D shares have a mandatory cumulative dividend of $1.25 per share, which is payable on a semi-annual basis in September and December each year to holders of record on November 30 and May 31. The preferred shareholders have certain liquidation preferences and do not have any voting rights and have liquidation preferences.rights.

At June 30, 20082009 and December 31, 2007,2008, the Company had a total of 26,680 preferred shares Series C shares and 11,640 preferred shares Series D shares issued and outstanding. As of June 30, 20082009 and December 31, 2007,2008, the Company hasCompany’s accumulated dividends payable balances of $418,000$500,550 and $376,725,$459,275, respectively. The Company did not declaredeclared dividends of $41,275 during the three and does not intend to declare any dividends as ofsix months ended June 30, 2008.2009.

F-15

5. EARNINGS (LOSS) PER SHARE

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the three and six months ended June 30, 2008:

  Three months ended June 30, 2008 
  Income     Per Share 
  (Loss)  Shares  Amount 
          
Net income $438,349       
Less: Preferred stock dividends  (41,275)      
Basic income available to common shareholders $397,074   15,344,656  $0.03 
             
Add: Preferred dividends  41,275         
Add: Interest on convertible debt  148,382   -     
Add: Dilutive impact of convertible preferred stock  -   582,000     
Add: Dilutive impact of convertible debt  -   29,500,000     
Add: Dilutive impact of options and warrants  -   24,182     
             
Diluted income available to common shareholders $586,731   45,450,838  $0.01 

  Six months ended June 30, 2008 
  Income     Per Share 
  (Loss)  Shares  Amount 
          
Net income $764,184       
Less: Preferred stock dividends  (41,275)      
Basic income available to common shareholders $722,909   15,344,656  $0.05 
             
Add: Preferred dividends  41,275         
Add: Interest on convertible debt  299,403   -     
Add: Dilutive impact of convertible preferred stock  -   582,000     
Add: Dilutive impact of convertible debt  -   29,500,000     
Add: Dilutive impact of options and warrants  -   2,343,000     
             
Diluted income available to common shareholders $1,063,587   47,769,656  $0.02 

F-16

The computation of diluted earnings per share does not assume conversion or exercise of securities that may have an anti-dilutive effect on earnings per share. Convertible preferred stock, convertible debt, stock options and warrants that have not been included in the diluted income per share computation totaled 76,073,976 for the period ended June 30, 2009.

6. RESTATEMENTS

June 30,2008

The statement of operations and statement of cash flows for the three and six months ended June 30, 2008 included herein were restated to reflect the effect of changes to the original accounting for the CAMOFI Note issued in February 2006.  The original accounting did not record the separate derivative for the conversion option and the warrants in accordance with FAS 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock”.

The effect of these changes impacted the balance sheet and the statement of operations from February 2006 through December 31, 2008. The balance sheet effect is due to recording the conversion option and warrant liabilities and the effect on the statement of operations is due to the gains and losses from the quarterly fair value adjustments and an increase in interest expense. Accordingly, the statement of operations for the three and  six months ended June 30, 2008 has been restated as summarized below:

Effect of Correction As Previously Reported  Adjustment  As Restated 
Balance Sheet as of June 30, 2008            
Conversion Option Liability  -   3,021,989   3,021,989 
Warrant Liability  -   186,916   186,916 
Accumulated Deficit  13,098,072   1,203,869   14,301,941 
Total Stockholders’ Deficit (equity)  3,022,952   3,185,486   6,208,438 
Statement of Operations for the three months ended June 30, 2008            
Marked-to-Market Gain (Loss)  -   (515,057)   (515,057) 
Net Income (Loss)  (849,305)  1,241,827   392,522 
Net Income (Loss) Available to common shareholders  (890,580)   1,241,827   351,247 
EPS - Basic  (0.06)  0.08   0.02 
EPS - Diluted  (0.06)  0.08   0.02 
Statement of Operations for the six months ended June 30, 2008            
Marked-to-Market Gain (Loss)  -   785,705   785,705 
Net Income (Loss)  (1,824,232)  2,542,589   718,357 
Net Income (Loss) Available to common shareholders  (1,865,507)   2,542,589   677,082 
EPS - Basic  (0.13)  0.18   0.05 
EPS - Diluted  (0.13)  0.18   0.05 

March 31, 2009

The statement of operations and statement of cash flows for the three months ended June 30, 2009 included herein reflect the effect of changes to the original accounting for the CAMOFI and CAMZHN notes issued in February 2009, certain adjustments related to the Company’s contract accounting, a misclassification error and for the valuation of the related derivative liabilities at March 31, 2009.

F-17

The effect of these changes impacted the balance sheet and the statement of operations from January 1, 2009 through March 31, 2009. The balance sheet effect is due to adjusting the conversion option discount that was originally recorded on the CAMOFI and CAMZHN notes issued in February 2009, the valuation of the related derivative liabilities certain adjustments related to the Company’s contract accounting, a misclassification error and for the valuation of the related derivative liabilities at March 31, 2009 and the valuation of the derivative liabilities associated with the 12% CAMOFI and 15% CAMZHN notes.  The effect on the statement of operations is due to the gains and losses from the revised quarterly fair value adjustments and an increase in interest expense from the increased amortization expense related to the adjustment of the conversion option discounts that were recorded on the CAMOFI and CAMZHN notes issued in February 2009. Accordingly, the effect of the restatements on the balance sheet at March 31, 2009 and statement of operations for the three months ended March 31, 2009 has been summarized below:
 
Effect of Correction As Previously Reported  Adjustment  As Restated 
Balance Sheet as of March 31, 2009            
             
(1) Costs in Excess of Billings  15,551   86,477   102,028 
             
(2) Deferred financing costs  435,986   108,750   544,736 
             
(3) Billings in Excess of Costs  823,478   (216,417)   607,061 
             
(4) February 2009 Convertible Notes  464,984   49,798   514,782 
             
(5) Derivative Liability  4,885,000   (578,972)   4,306,028 
             
(6)Accumulated Deficit  16,701,824   (1,040,414)   15,661,410 
             
Statement of Operations for the three months ended March 31, 2009            
             
(7) Sales  1,298,458   (243,756)   1,054,702 
             
(8) Cost of sales  1,365,543   (546,650)   818,893 
             
(9) Marked-to-Market Gain (Loss)  (2,738,436)   937,458   (1,800,978) 
             
(10) Interest expense  (490,408)   (199,938)   (632,145) 
             
(11) Net Loss  (3,821,869)   1,040,414   (2,781,455) 
             
Net Loss Available to common shareholders  (3,821,869)   
1,040,414
   (2,781,455) 
             
EPS – Basic  (0.25)  0.07   (0.18) 
             
EPS - Diluted  (0.25)  0.07   (0.18) 

F-18

(1)Adjustment in order to reconcile the Company’s balance sheet account to the Company’s contract accounting worksheets.
(2)Represents the reclassification of $145,000 of financing costs in connection with the February 2009 notes, less amortization of $36,250.
(3)Adjustment in order to reconcile the Company’s balance sheet account to the Company’s contract accounting worksheets.
(4)Adjustment reflects an increase of $278,486 of debt discount related to the valuation of the conversion options and an increase of $119,938 of amortization of such options, net of reclassification of financing costs of $108,750 noted in (1) above.
(5)Adjustment reflects an increase of $278,486 related to the valuation of the conversion options of the February 2009 notes and a decrease in the loss on fair value of $937,458 and corrections of $80,000 of misclassifications between the change in fair value and interest expense.
(6)and (11) The cumulative effect of adjustments (7) through (11).
(7)and (8) Adjustment in order to reconcile the Company’s P&L accounts to the Company’s contract accounting worksheets.
(9)Adjustment reflects an increase of $278,466 in the valuation of the conversion options in connection with the February 2009 notes, a decrease in the valuation of all derivatives of $578, 972 and a decrease in the loss on fair value of $937,458.
(10)See (2) and (4) above.

F-19

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. Certain statements contained herein that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position, expectations about pending litigation and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, and market and general policies, competition from other similar businesses, and market and general economic factors. All forward-looking statements contained in this Form 10-Q are qualified in their entirety by this statement.

OVERVIEW

The Company is engaged in acquiring, re-manufacturing and selling pre-owned Computer Numerically Controlled ("CNC") machine tools to manufacturing customers. The Company provides rebuilt, retrofit and remanufacturing services for numerous brands of machine tools. The remanufacturing of a machine tool, typically consisting of replacing all components, realigning the machine, adding updated CNC capability and electrical and mechanical enhancements, generally takes two to four months to complete. Once completed, a remanufactured machine is a "like new," state-of-the-art machine with a price ranging from $275,000 to $1,000,000, which is substantially less then the price of an equivalent new machine. The Company also manufactures original equipment CNC large turning lathes and attachments under the trade name Century Turn.

CNC machines use commands from onboard computers to control the movements of cutting tools and rotation speeds of the parts being produced. Computer controls enable operators to program operations such as part rotation, tooling selection and tooling movement for specific parts and then store the programs in memory for future use. The machines are able to produce parts while left unattended. Because of this ability, as well as superior speed of operation, a CNC machine is able to produce the same amount of work as several manually controlled machines, as well as reduce the number of operators required; generating higher profits with less re-work and scrap. Since the introduction of CNC tooling machines, continual advances in computer control technology have allowed for easier programming and additional machine capabilities.

A vertical turning machine permits the production of larger, heavier and more oddly shaped parts on a machine, which uses less floor space when compared to the traditional horizontal turning machine because the spindle and cam are aligned on a vertical plane, with the spindle on the bottom.

The primary industry segments in which the Company’s machines are utilized to make component parts are in aerospace, power generation turbines, military, component parts for the energy sector for natural gas and oil exploration and medical fields. The Company sells its products to customers located in the United States, Canada and Mexico.
2

Over the last four years, the Company has designed and developed a large horizontal CNC turning lathe with productivity features new to the metalworking industry. The Company believes that a potential market for the Century Turn Lathe, in addition to the markets mentioned above, is aircraft landing gear.

We provide our manufactured and remanufactured machines as part of the machine tool industry. The machine tool industry worldwide is approximately a 30$30 billion dollar business annually. The industry is sensitive to market conditions and generally trends downward prior to poor economic conditions, and improves prior to an improvement in economic conditions.

4

Our machines are utilized in a wide variety of industry segments as follows: aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and transportation. With the recent downturn in the aerospace industry, we have seen an increase in orders from new industries such as defense and medical industries.

The Company's current strategy is to expand its customer sales base with its present line of machine products. The Company's growth strategy also includes strategic acquisitions in addition to growing the current business. Plans for expansion are funded through current working capital from ongoing sales. A significant acquisition will require additional financing.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 20082009 COMPARED TO JUNE 30, 2007.2008.

Revenues.  The Company generated revenues of $1,359,630 for the three months ended June 30, 2009, which was a $75,046 or 5% decrease from $1,434,676 for the three  months  ended  June 30,  2008, which was a $1,165,471 or 45% decrease from $2,600,147 for the three months ended June 30, 2007.2008.  The decrease is the result of lower than usual sales volume,and a tighter credit market, and manufacturing inefficiencies caused by the relocation of the Company’s operations to a new facility.market.

Gross Profit.  Gross profit for the three  months  ended June 30,  2008,2009,  was $71,062$165,900 or 5%12% of revenues,  compared to $711,002$71,062 or 27%5% of revenues for the three months ended June 30, 2007,2008, a 90% decrease.133% increase. The decreaseincrease in gross profit is due to certain fixed overhead expenses appliedmanagement strategy to lower revenues and increased cost of sales due to setting up a new plant after relocation.through reduction of overhead expenses and cost of materials.

Operating Expenses.  The Company incurred total operating expenses of $296,534 for the three months ended June 30, 2009, which was a $130,028 or 30% decrease from $426,562 for the three months ended June 30, 2008. In the three months ended June 30, 2009, compared with the three months ended June 30, 2008, all the operating expenses increased (decreased) as follow:

Increase/(Decrease)
%
Consulting and other compensation4
Salaries and related13
Selling, general and administrative(51)

The increase in salaries and related costs is due to the reclassification of certain costs to compensation. Selling, general and administrative expenses decreased due to management strategy to reduce operating expenses.

Operating Loss.  Operating loss for the three months ended June 30, 2008,2009, was $355,500$130,634 compared to an operating incomeloss of $192,616$355,500 for the three months ended June 30, 2007.2008. The increasedecrease in loss of $548,116$224,866 is primarily due to decreased revenuescost of sales and lower gross profit on jobs in progressdecreased selling, general and administrative expenses for the quarter ended June 30, 2008.2009.

Interest Expense and Debt Discount Amortization.  Interest expense for the three months ended June 30, 2008,2009, was $497,382$952,461 compared with $722,273$497,382 for the three months ended June 30, 2007.2008. The decreaseincrease of $224,891$455,079, or 31%91%, in interest expenses is primarily due to $278,000additional interest on new convertible loans.

Change in Fair Value of debt discount charged to interest expense related toDerivative Liabilities. In connection with its convertible notes, the Company recorded conversion of $350,000 of principal from the CAMOFI Note into the Company’s common stock duringoptions and warrant derivative liabilities. The derivative liabilities are reevaluated each reporting period. During the three months ended June 30, 2007.2009, we recorded a gain of $225,075 on the change in fair value due to the decrease in our stock price from March 31, 2009.


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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 20082009 COMPARED TO JUNE 30, 2007.2008.

Revenues.  The Company generated revenues of $2,414,332 for the six months ended June 30, 2009, which was a $546,946 or 18% decrease from $2,961,278 for the six months ended June 30, 2008, which was a $2,824,338 or 49% decrease from $5,785,616 for the six months ended June 30, 2007.2008.  The decrease is the result of lower thanthen usual sales volume,and a tighter credit market, and business interruption and manufacturing inefficiencies caused by the relocation of the Company’s operations to a new facility.market.
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Gross Profit.  Gross profit for the six months ended June 30, 2008,2009, was 401,709 or 17% of revenues, compared to $289,185 or 10% of revenues compared to $1,896,241 or 33% of revenues for the six months ended June 30, 2007, a 85% decrease. The decrease in gross profit is due to certain fixed overhead expenses applied to lower revenues and increased cost of sales due to relocation.

Operating Loss. Operating loss for the six months ended June 30, 2008, was $900,286 compared to operating income of $658,582 for the six months ended June 30, 2007. The increase in loss of $1,558,868 is primarily due to one time relocation expenses, decreased revenues and lower gross profit on jobs in progress for the six months ended June 30, 2008.

Operating Expenses.  The Company incurred total operating expenses of $744,257 for the six months ended June 30, 2009, which was a $445,214 or 37% decrease from $1,189,471 for the six months ended June 30, 2008. In the six months ended June 30, 2009, compared with the six months ended June 30, 2008, all the operating expenses increased (decreased) as follows:

Increase/(Decrease)
%
Consulting and other compensation(60)
Salaries and related85
Selling, general and administrative(49)

The decrease in consulting and other compensation is due to the reduction in the number of consulting contracts and the expiration of the existing contracts. The increase in salaries and related costs is due to the reclassification of certain costs to compensation. Selling, general and administrative expenses decreased due to management strategy to reduce operating expenses.

Operating Loss.  Operating loss for the six months ended June 30, 2009, was $342,548 compared to $900,286 for the six months ended June 30, 2008. The decrease in loss of $557,738 or 62% is primarily due to decreased consulting and other compensation expenses and selling, general and administrative expenses.

Interest Expense and Debt Discount Amortization.  Interest expense for the six months ended June 30, 2008,2009, was $984,151$1,620,856 compared with $1,187,514$984,151 for the six months ended June 30, 2007.2008. The decreaseincrease of $203,363 or 17%$636,705 in interest expenses is primarily due to $278,000additional interest on new convertible loans.

Change in Fair Value of debt discount charged to interest expense relatedDerivative Liabilities. In connection with its convertible notes, the Company recorded conversion options and warrant derivative liabilities. The derivative liabilities are reevaluated each reporting period. During the six months ended June 30, 2009, we recorded a loss on the change in fair value of derivative liabilities due to the conversionincrease in our stock price during the period, in addition to recording $479,752 of $350,000 of principal fromadditional derivatives during the CAMOFI Note into the Company’s common stockperiod.

FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

The net decrease in cash during the six months ended June 30, 2007.
2009 was $31,889.

FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

The net cash decrease during the six months ended June 30, 2008 was $281,729. The decrease is due to $312,573 net cash used in operating activities.

For the six months ended June 30, 2008,2009, the cash provided by financing activities was $30,844,$745,592, compared with $489,696 cash used in financing activities$30,844 in the six months ended June 30, 2007.2008. For the six months ended June 30, 2007,2009, $777,481 cash was used to make principal payments on the CAMOFI loan. For the six months ended June 30, 2008, no principal payments were made on the CAMOFI loan.by operating activities.


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GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has losses from operations year to date of approximately $849,000, an accumulated deficit of approximately $13,098,000 and$16,455,000, a negativenet loss of approximately $3,534,000, a working capital balancedeficit of approximately $701,000.$8,108,000 and was also in default on two of its convertible notes. These factors among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through anticipated increased sales along with renegotiated or new debt and equity financing arrangements which management believes may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2008.2009. Therefore, the Company will be required to seek additional funds to finance its long-term operations.

In response to these problems, management has taken the following actions:
·The Company continues its aggressive program for selling inventory.
·The Company continues to implement plans to further reduce operating costs.
·The Company is seeking investment capital through the public and private markets.
·The Company has successfully restructured its debt, eliminating the penalties and interest for past default and extending the repayment term (See Note 3).

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The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

In response to these problems, management has taken the following actions:
·
The Company continues its aggressive program for selling machines.
·
The Company continues to implement plans to further reduce operating costs.
·
The Company is seeking investment capital through the public and private markets.
·
The Company is seeking strategic acquisition candidates

The condensed consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

INFLATION AND CHANGING PRICES

The Company does not foresee any adverse effects on its earnings as a result of inflation or changing prices.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheet and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The accounting policies stated below are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:

Revenue Recognition

Service revenues are billed and recognized in the period the services are rendered.

The Company accounts for shipping and handling fees and costs in accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Such fees and costs incurred by the Company are recorded to cost of goods sold and are immaterial to the operations of the Company.

In accordance with SFAS 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate of markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience, current industry trends and estimated costs.

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In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," as amended by SAB No. 104 which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. Management believes that the Company's revenues consist primarilyrevenue recognition policy for services and product sales conforms to SAB 101 amended by SAB 104. The Company recognizes revenue of long-term contracts with customers. pursuant to SOP 81-1.

Method of Accounting for Long-Term Contracts

The Company uses the percentage-of-completion method of accounting to account for long-term contracts and, therefore, takes into account the cost, estimated earnings and revenue to date on fixed-fee contracts not yet completed. The percentage-of-completion method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The Company recognizes revenue on contracts pursuant to Statements of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

For revenues from stock inventory the Company follows Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue other than revenue on contacts, and provides guidance for presentation of this revenue and for disclosure related to these revenue recognition policies in financial statements filed with the SEC.
For contracts, theThe amount of revenue recognized at the financial statement date is the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates of cost to complete. It is not related to the progress billings to customers. Contract costs include all materials, direct labor, machinery, subcontract costs and allocations of indirect overhead.

Because long-term contracts may extend over a period of time, changes in job performance, changes in job conditions and revisions of estimates of cost and earnings during the course of the work are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements.
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Contracts that are substantially complete are considered closed for consolidated financial statement purposes. Costs incurred and revenueRevenue earned on contracts in progress in excess of billings (under billings) areis classified as a current asset. Amounts billed in excess of costs and revenue earned (over billings) are classified as a current liability.
The Company accounts for shipping and handling fees and costs in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Shipping and handling fees and costs incurred by the Company are immaterial to the operations of the Company and are included in cost of sales.
In accordance with Statements of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate for markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience, current industry trends and estimated costs. As of June 30, 2008, the Company estimated the markdowns, price concessions and warranty costs and concluded amounts are immaterial and did not record any adjustment to revenues.

Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out method. Inventories represent cost of work in process on units not yet under contract. Cost includes all direct material and labor, machinery, subcontractors and allocations of indirect overhead. (See Note 1 to Condensed Consolidated Financial Statements, Inventory section)
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Other Significant Accounting Policies

Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. The policies related to consolidation and loss contingencies require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standards setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Note 1 of Notes to Condensed Consolidated Financial Statements, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


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ITEM 4T.4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, who is also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer concluded as of June 30, 20082009 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed immediately below.

Management’s Report on Internal Control Over Financial ReportingMaterial Weaknesses

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material affect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as being a deficiency, or combination of deficiencies, that results in a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a significant misstatement of the company’s annual or interim financial statements will not be prevented or detected.

Management assessed and evaluated the effectiveness of our internal control over financial reporting as of December 31, 2007. Management identified five material weaknesses relating to our internal control over financial reporting, as follows:

(1)We had not effectively implemented comprehensive entity-level internal controls.
(2)We did not have a sufficient complement of personnel with appropriate training and experience in generally accepted accounting principals, or GAAP.
(3)We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff.
(4)We did not implement financial controls that were properly designed to meet the control objectives or address all risks of the processes or the applicable assertions of the significant accounts.
(5)Due to the material weaknesses identified at our entity level controls we did not test whether our financial activity level controls or our information technology general controls were operating sufficiently to identify a deficiency, or combination of deficiencies, that may result in a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis.
The foregoing material weaknesses are described in detail below under the caption “Material Weaknesses.”As a result of these material weaknesses, our Chief Executive Officer concluded that we did not maintain effective internal control over financial reporting as of December 31, 2007.
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In making its assessment of our internal control over financial reporting, management used criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control-Integrated Framework. Because of the material weaknesses described above, management believes that, as of December 31, 2007, we did not maintain effective internal control over financial reporting.

An independent firm assisted management with its assessment of the effectiveness of our internal control over financial reporting, including scope determination, planning, staffing, documentation, testing, and overall program management of the assessment project.

Inherent Limitations on the Effectiveness of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Material Weaknesses

Material Weaknesses

1.   We had not effectively implemented comprehensive entity-level internal controls, as evidenced by the following deficiencies:

   We did not establish an independent Audit Committee who are responsible for the oversight of the financial reporting process, nor was an Audit Committee Charter defined.  At the current time we do not have any independent members of the Board who could comprise this committee.

·We did not establish an independent Audit Committee who are responsible for the oversight of the financial reporting process, nor was an Audit Committee Charter defined. At the current time we do not have any independent members of the Board who could comprise this committee.
   We did not establish an adequate Whistle Blower program for  the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters to the Audit Committee and Board of Directors.

·We did not establish an adequate Whistle Blower program for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters to the Audit Committee and Board of Directors.
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·We did not have an individual on our Board, nor on the Audit Committee, who meets the “Financial Expert” criteria.

·We did not maintain documentation evidencing quarterly or other meetings between the Board, senior financial managers and our General Counsel.   We did not maintain documentation evidencing quarterly or other meetings between the Board, senior financial managers and our outside general counsel.  Such meetings include reviewing and approving quarterly and annual filings with the Securities and Exchange Commission and reviewing on-going activities to determine if there are any potential audit related issues which may warrant involvement and follow-up action by the Board.

·We did not follow a formal fraud assessment process to identify and design adequate internal controls to mitigate those risks not deemed to be acceptable.

·We did not conduct annual performance reviews or evaluations of our management and staff employees.

2.(2)   We did not have a sufficient complement of personnel with appropriate training and experience in GAAP, as evidenced by the following deficiencies:

·We do not have a formally trained Chief Financial Officer who is responsible for the oversight of the accounting function.  Currently the CEO is responsible for this function, but has not had formal accounting or auditing experience.

 
·The Controller is the only individual with technical accounting experience in our company but is limited in the exposure to SEC filings and disclosures and is not a full-time employee of the company.
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   The Accountant is the only individual with technical accounting experience in our company but is limited in the exposure to SEC filings and disclosures.

·We have not consulted with other outside parties to assist us in the SEC filings and disclosures prior to the December 31, 2007 10-KSB filing during 2007.
   We have not consulted with other outside parties with accounting experience to assist us in the SEC filings and disclosures prior to the December 31, 2008 10-K filing during 2009.

3.(3) We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff and inadequate management oversight.

4.(4)   We did not adequately design internal controls as detailed by the following:follows:

·
The controls identified in the process documentation were not designed effectively and had no evidence of operating effectiveness for testing purposes.
·
The controls identified in the process documentation did not cover all the risks for the specific process
·
The controls identified in the process documentation did not cover all applicable assertions for the significant accounts.

5.(5)   Due to the material weaknesses identified at our entity level controls we did not test whether our financial activity level controls or our information technology general controls were operating sufficiently to identify a deficiency, or combination of deficiencies, that may result in a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis.
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We are in the process of remediation of the above noted weaknesses and are evaluating the most efficient method to complete this task.  However, based on our review, management has concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

Changes In Controls and ProceduresCHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no significant changes in ourthe Company's internal controlscontrol over financial reporting that occurred during ourthe Company's most recent fiscal quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting. Inherent limitations exist in any system of internal control including the possibility of human error and the potential of overriding controls. Even effective internal controls overcan provide only reasonable assurance with respect to financial reporting.statement preparation. The effectiveness of an internal control system may also be affected by changes in conditions.

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PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings

None.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.     Defaults Upon Senior Securities

None.Starting October 2008, the Company has been in default with all monthly payments on the 12% CAMOFI and 15% CAMHZN Convertible Note payable. As of June 30, 2009, the Company’s default principal and interest aggregate to $1,100,000.

Item 4.     Submission of Matters to a Vote of Security Holders

None.

Item 5.     Other Information

None.

Item 6.     Exhibits

Exhibit 31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 302 of the Sarbanes-Oxley act of 2002 by Chief Executive Officer and
Exhibit 31.2 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 302 of the Sarbanes-Oxley act of 2002 by Chief Financial Officer

Exhibit 32.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under Section 906 of the Sarbanes-Oxley act of 2002

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

August 14, 2009NEW CENTURY COMPANIES, INC.
  
 
NEW CENTURY COMPANIES, INC.



Date: August 14, 2008
/s/ DAVID DUQUETTE
 
Name:  David Duquette
Title: Chairman, President and Director

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

August 14, 2009/s/ DAVID DUQUETTE
Name:  David Duquette
Title: Chairman, President and Director
  
Date: August 14, 20082009
 /s/ DAVID DUQUETTE
/s/ JOSEF CZIKMANTORI
 
Name: David Duquette
Title: Chairman, President and Director
Date: August 14, 2008
/s/ JOSEF CZIKMANTORI
Josef Czikmantori
 
Name: Josef Czikmantori
Title: Secretary and Director

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